Ruth Kelly:
I do not think that, in response to some of these debates, I could have been more open and transparent than I have been this evening. I should like to concentrate on the amendments on financing costs, which we have not had an opportunity to discuss so far tonight, rather than to reopen previous debates, which I covered in substantial detail earlier this evening. However, perhaps I should start by answering the point about pipelines made by the hon. Member for Banff and Buchan (Mr. Salmond), who speaks for the Scottish National party.

I freely admit that different pipelines have different tax treatments. That is due to changes made by the previous Conservative Government. I admit that the FLAGS pipeline is taxed at a higher rate, but full tax relief is

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available on the cost of its constructionalso at a higher rate. The comparisons are not simple; these are complicated reforms.

Mr. Salmond rose

Sir Robert Smith rose

Ruth Kelly:
I do not want to reopen previous debates; I have clearly made the case for the changes before us tonight. I should like to turn to the amendment on financing costs and consider whether such costs should be taken into account in calculating the profits base for the supplementary charge. If we were to take account of those costs, it would allow companies to manipulate their borrowing to minimise the effect of the charge. [Interruption.] There is some scepticism among those on the Liberal Democrat Front Bench, but I put it to the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and other hon. Members that oil companies have access to sophisticated tax planning advice.

One need not be a tax planner to realise that financing costs have to be disallowed if the supplementary charge is to work effectively; otherwise it would clearly be in companies' interests to arrange their affairs so that all their North sea activities were funded by borrowing, for which they could claim relief against a 40 per cent. tax rate, while their other activitiestaxed at 30 per cent.were funded by capital. I shall expand on those comments as I progress.

If we allowed financing costs to reduce the profits subject to the supplementary charge we would have to increase the rate of the charge to ensure that the nation received a fair share of the economic rent derived from the North sea. I cannot say what that increased rate might be; it would depend on how far individual companies were able or chose to arrange their affairs to reduce the impact of a 10 per cent. rate. Clearly, however, raising the rate would penalise those companies without the scope to manipulate their borrowings. A complete disallowance of financing costs for the supplementary charge is much fairer.

I understand the points made by the hon. Member for Gordon (Malcolm Bruce), my hon. Friend the Member for Waveney (Mr. Blizzard) and the hon. Member for Banff and Buchan that debt relief for financing costs might be more of a burden for some smaller companies. An effective measure is needed, however, to prevent erosion of the tax base. It would not be feasible for us to try to differentiate one type of company from another. We are trying to simplify the oil taxation regime.

Sir Robert Smith rose

Ruth Kelly:
I shall continue my argument for a moment.

Companies will still be able to offset 75 per cent. of their North sea borrowing against tax, and with the 100 per cent. tax relief for capital expenditure, the package should still encourage investment by small and large companies.

Some people who are concerned about this issue have suggested alternatives. One is to try to apportion all the financing costs of a group between North sea and non-North sea activities rather than deny costs altogether.

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There would not be a case, however, to apportion those costs purely for the supplementary charge and not for corporation tax generally. It has not been suggested to me or my colleagues that companies would want such a rule to apportion financing costs.

Mr. Flight:
One aspect that I raised was that, in order for the supplementary charge, should it go ahead, to count for double taxation relief, it would be necessary to allow financing costs. It would be a disaster if it were not allowable, particularly for United States companies. As a practical matter, therefore, the Government may be forced to use a regime that permits financing costs to be deductible in some way.

Ruth Kelly:
I said earlier in the debate that we listened to the industry and whether it had concerns about the double taxation treaty and the interpretation of it by our treaty partners. We remain committed to listening to those concerns. If there are real issues, we shall take them up with the United States authorities, or, if more general concerns are expressed, we shall deal with it in other ways. I would not want to rule that out altogether. We have opted, however, for simplicity and for a measure that will avoid tax evasion. What we have done is fair and simple. I have not yet heard a real call from the industry for an alternative. If I do, however, I shall listen to it. We must introduce an effective and simple regime for the future, which will generate investment, have a positive impact on jobs and raise a fair share of revenue for the future.

Sir Robert Smith:
Will the Economic Secretary make sure that her colleagues who are no longer in the Chamber, but who were earlier praying in aid the fact that the changes would benefit smaller companies the most, read what she has said? As financing charges are being excluded, the smaller companies, which rely on borrowing, will suffer more under this part of the clause.

Ruth Kelly:
I do not accept that. Although I accept that small companies may have a particular issue with financing costs, I do not accept that the Budget is in any way less good for small companies than it is for larger companies. The hon. Gentleman must also take into account all the other changes for small companies that we have introduced in the Budget, including the reduction in the corporation tax rate.

Overall, small companies will not be particularly disadvantaged by the change. However, I have been open with the Committee and said that there may be issues involved. If the industry has concerns, we will listen to them. We are committed to working with the industry to get the supplementary charge recognised under double taxation treaties. If there are concerns, we will act on them if possible.

Mr. Salmond:
I think that the Economic Secretary has now conceded the point on differential taxation for pipelines. She may blame the Tories for the outrageous 70 per cent. tax on FLAGS at St. Fergus, but the differential between Bacton and Zeebrugge is created by this Budget. Now that it has been drawn to her attention, will she, in the interests of fairness and creating a level

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playing field, undertake to do something about not just the Bacton-Zeebrugge differential but the tax on tariff income going through the FLAGS line at St. Fergus?

Ruth Kelly:
I have dealt in detail with the specific point that the hon. Gentleman raises. If he wishes to raise other issues with me, I can deal with them in writing.

I think that I have made the point fairly. We need to raise a fair share of revenue from North sea oil and introduce a system of taxation that is simple, transparent and will promote investment and jobs over the longer term.

Malcolm Bruce:
I am grateful that the Economic Secretary has acknowledged that there is a problem that she is willing to address. However, I am disappointed by the way in which she dismisses a real and serious concern that will materially affect small companies.

I make no apology for using the UKOOA brief in this context, but we are told that 70 per cent. of a project's development funding could come from debt finance. To make no allowance for that would clearly have a devastating effect on some projects. Indeed, it would make them completely non-viable or, at least, non-viable for those companies that have to finance the projects in that way. In those circumstances, it is strange that the Economic Secretary regards her proposals as fair. They are fair for the large companies that can finance the projects from equity finance.

I accept the Economic Secretary's remarks that there is a worry that companies will change their method of financing to qualify for the tax relief. However, if the Oil Taxation Office has the poweron the basis of the detailed analysis that she gave in the previous debate, the Treasury claims to understand how oilfield financing operatesit should be possible to reach a conclusion that would allow at least some of the costs to be calculated.

Although I welcome the fact that the Economic Secretary has acknowledged that there might be a problem and that, if the industry can persuade her, the Government might adjust the scheme, the fact that she is not minded to do so means that the amendment is necessary. I ask the Committee to support it.